There are two primary schools of thought when it comes to repaying debt: the Snowball Method, and the Avalanche Method. Both methods are relatively simple. The Snowball Method focuses on paying the lowest balance off first. The Avalanche Method focuses on paying off the highest interest rate debt first.
Here’s a nifty infographic I made to show you the differences between the two methods (click to enlarge):
Snowball Method
The Snowball Method was made popular by Dave Ramsey. Basically, this method encourages you to pay off your lowest balance off first and use your old payment amount to add to your second payment. The Snowball Method is designed to keep you motivated by paying off smaller loans quickly to demonstrate progress.
Here is an example of the Snowball Method in use:
After Bill One is paid:
After Bill Two is paid:
Then you’re debt free! Yay!
Pros:
- Will show progress faster
- Easier to stay motivated
Cons:
- Does not take interest rate into account
- Pay more interest
Avalanche Method
The Avalanche Method is more of long-term strategy. The Avalanche Method is basically paying off the debt with the highest interest rate first, then applying your old monthly payment amount to your next highest interest rated debt.
Here is an example of the Avalanche Method in use:
After Bill One is paid:
After Bill Two is paid:
Then you’re debt free! Yay!
Pros:
- Pay the least amount of interest possible over time
- May require less time to pay off debt
Cons:
- More likely to become discouraged for highest debts
- Often takes longer to show progress
Conclusion
There are benefits to both methods. The primary things you need to look are what is right for you and your situation. I highly recommend you download this spreadsheet to help you figure out the best way to go about it.
What method do/did you use to pay down your debt?